Energy independence doesn't necessarily mean cheap gasoline

JOSHUA POLSON/jpolson@greeleytribune.com
An older oil pump sits dormant along Highway 85 near Platteville. With Colorado consuming 92 million barrels of oil a year older pumps and new pumper are seen working along side each other to keep up with the demand.

JOSHUA POLSON/jpolson@greeleytribune.com
A shadow of a oil and gas worker is cast on one of the several large water tanks at High Sierra Water Services facility east of Platteville. The water in these tanks is vital to hydraulic fracturing operations throughout Weld County. With hydraulic fracturing becoming widely used across the nation-wide there will undoubtedly be an impact on the United States oil and gas production.

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The evidence of the oil and gas boom fills almost every nook and cranny of the Weld County landscape as trucks caravan down the roads and oil rigs reach into the sky, all working day and night to mine that precious commodity that fuels not only our gas tanks, but jobs and local government coffers.

That added production is a cog in a much larger wheel moving North America toward energy independence, a dream of every president since Richard Nixon.

That means sending fewer American dollars overseas and providing for more stability when it comes to domestic energy supplies.

“The fact that we have open liquid markets, and global competition, certainly for oil and increasing global competition for gas, the U.S. will be in the catbird seat for a while,” said Pete Stark, an oil and gas analyst with IHS in Denver. “Over this next decade, we might see exports more than double.”

But greater production, higher exports and the promises of politicians are unlikely to translate into gasoline prices that are all that much cheaper at the pump.

The reason: simple supply and demand.

Weld will help contribute to the supply, but over the next 20 years, most of that demand will be far from the oil fields of Weld County.

World outlook

Last year, even though the country produced 5.7 million barrels of oil per day, it had to import 8.9 million barrels of oil per day to satisfy domestic demand. Total U.S. crude oil production is on target to reach 6.4 million barrels per day this year, the highest for any year since 2003, according to the US. Energy Information Administration. Next year, the country is expected to produce 7 million barrels per day, still not enough to meet domestic demand.

The International Energy Agency, in its World Energy Outlook last month, said that with production growth in the United States, it could overtake production of Saudi Arabia by 2020 and could become self-sufficient in energy by 2035. That will move trade east to China.

In a news release, IEA executive director Maria van der Hoeven stated North America is at the forefront of “a sweeping transformation in oil and gas production that will affect all regions of the world.”

Advances in technology — providing public policy doesn’t put a halt to drilling and exploration — are helping producers across the country pump more oil all the time, helping to satisfy more of the domestic demand.

“The benefits we’ll realize immediately are less pressure for pushing oil over $100 a barrel and much less volatility in the price of oil, which causes anxiety and short-term price hikes,” Stark said. “As those things moderate, the price at the pump will moderate. … We’re already seeing a moderation of volatility in world oil prices. The U.S. dramatically increasing oil production is helping to relieve a lot of pressure on the world.”

What does energy independence mean?

The term “energy independence” has been coined to mean that a country’s production surpasses its consumption. Oil independence, even if achieved, as some have predicted for North America by 2035, doesn’t mean we erect a wall around North America and call it good.

“It just means on the back of an envelope, we’ll produce more than we consume,” Stark said.

But producing more of our own is bound to lower prices at the pump, though maybe not as much as some would think. Oil prices are set on a global scale, and they are expected to remain around the $100 a barrel mark, keeping gasoline prices from dipping below $3 a gallon.

A good example of energy independence comes from Canada, which feeds 29 percent of the United States’ oil appetite. Though the country is a net exporter, gas prices remain higher than the United States, mostly because of taxes. While 11 percent of the price of a gallon of U.S. gasoline goes to pay taxes, 31 percent of Canadian pump prices pay taxes. That turns into dollars per gallon in Europe, experts say.

But consumer demand is going down, which would lower production, if the U.S. didn’t have a ready market elsewhere.

“With lower oil output, there’s less supply, which would translate to higher gas prices,” said Adam Bedard, an oil and gas analyst in Denver, a partner in PA Consulting. “In the global scheme, the energy use per person is going down in almost every country.”

In the United States, especially, more efficient fuel standards are coming into play, reducing oil demand.

What’s keeping that demand on pace are the growing oil and gas demands from China, India and other developing countries.

“One of the neat dynamics in the U.S., supply is growing and demand is shrinking, so that’s why we’re going to be exporting,” Bedard said.

Adding production

Today the United States, as the biggest oil consumer in the world, doesn’t produce as much as it consumes, putting foreign imports in high demand. The same is true of Colorado — even with all those rigs dotting the horizon in eastern Weld, where most of Colorado’s crude is produced.

Colorado consumes about 92 million barrels of oil a year, or 252,000 barrels per day, but it produces only about 43 percent of that need. Colorado as a whole produced only 1.7 percent of the country’s need in 2010, according to the US Energy Information Association.

Colorado must then import from other states, usually Texas and Oklahoma.

But production is growing every year, with the advent of new technologies involving horizontal drilling, which has transformed Weld County’s drilling numbers, now on pace to help Colorado surpass a 40-year-old record.

Here in the Rocky Mountains, oil, and a facility to refine it into gas, Suncor Energy, are in our backyard. Transportation costs are at a minimum. As a result, most of the oil produced in the Rockies goes right back into Colorado fuel pumps, or jets or roads in the form of asphalt.

The fact that Colorado is producing more oil all the time already is helping just by putting more supply into the mix, as well as several other developing areas across the country. By mere geography and available refining capacity, prices tend to be cheaper — about 50 cents a gallon — than either of the coastal seaboards because the infrastructure is not fully in place to transport crude from the center of the country, where much of the production is occurring.

Suncor’s refining capacity limits of roughly 100,000 barrels of oil per day push much of the oil produced out to other markets to be refined. Colorado’s total production last year was at 106,974 barrels per day, but it competed for Suncor’s refining space with oil from Montana, Wyoming, North Dakota and a small percentage from Canada. Suncor, for proprietary reasons, will not reveal the exact percentages of its intake, but most of the Colorado crude is refined and sold at home, said Lisha Burnett, spokeswoman for Suncor.

Nationally, oil production is expected to increase substantially in the next few years, as horizontal drilling and fracking technologies bring life to old plays from Texas to Colorado to Ohio. Companies also are now testing northeastern Nevada for its prospects.

“As the U.S. becomes less dependent on imported oil, that means U.S. oil makes it way to the coasts,” Bedard said. “So the East Coast, which has traditionally sourced from foreign crude, can now get cheaper U.S. barrels.”

Getting independent

Though the U.S. is well on its way to “independence,” hurdles remain in the form of policy and infrastructure, and the cost of getting it out of the ground. Such global changes, improvements in cost and production don’t happen overnight; we still have roughly 20 years before that magical import inversion.

The global cost of oil still drives production. And while the U.S. can produce more and consume less in the years ahead, global demand for oil is soaring in countries like China and India, where new-found affluence is creating more factories and putting more cars on the road.

With barrel prices staying as stable as they are near the $100 a barrel market — Bedard forecasts about $85 a barrel next year — companies are investing in horizontal drilling programs where the price of drilling ranges from $4 million to $8 million per well.

“Producers need a trigger to make that investment, that’s why you’re seeing companies invest in oil and liquids production” so much in Colorado, said Stan Dempsey, president of the Colorado Petroleum Association, who represents the oil and gas industry. “The product is going to follow the price.”

Infrastructure is another issue, locally and nationally that needs to be tackled with the extra production. Getting product to market has remained an obstacle for areas like North Dakota and Colorado, where development has been booming in just the last few years. The planned Keystone XL Pipeline from Canada would pump an estimated 500,000 barrels daily into the North American mix, trimming gas prices an estimated 3 cents a gallon. A decision on that pipeline is expected next month from President Obama.

Infrastructure in Oklahoma and Texas, for example, has been in place for several years. Connecting the traditional routes, when balancing environmental concerns, has become tricky, as has been seen with the push-back on the XL Pipeline.

With the added production, companies have scrambled for extra transportation by rail and truck.

“If you have a barrel of oil in the Niobrara, it might cost you $2 to $3 a gallon to move it by pipeline. Rail might cost you $6 to $9 per barrel and trucking might be $10-$12,” Bedard said. “Ideally, you want to pay the least amount for shipping.”

Production in Colorado is surpassing traditional limits every day, and Suncor still only can refine about half of what Colorado produces, pushing that excess onto the national market, where prices compete on the global scale.

“One thing I’m absolutely certain of in a market like we have in the United States, if we can get more, cheaper oil into the market, there will be downward pressure on the price at the pump,” said Michael Whatley, vice president of the Consumer Energy Alliance, who is advocating for the XL Keystone Pipeline approval.

The increase in production in North Dakota and Colorado has sent companies scrambling to get it to market.

“Producers have worked very quickly to find markets for that product,” Dempsey said. “We’re not stranded. The marketplace has worked. Whatever they can’t market locally, they’re getting into (Oklahoma) and eventually out to the Gulf Coast.”